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Should I get private health insurance before it’s too late?

Ten years ago, a memorable series of television ads for a health insurance comparison website in Australia introduced a slurry of colourful, confusing, and bizarre terms into our vernacular. “Tossin’ possums”. “Cuddlin’ cactus”. And perhaps most famously, “puffin’ muffins”.

All of these phrases were intended to describe just how stupid one would have to be to not buy private health insurance (at least, through their website). But is that really the case? Would you have to be “puffin’ muffins” not to have private health insurance? In today’s post, we’ll take a look at the question of private health insurance. (With a few tips that apply to any kind of insurance you might consider taking out).

Where do you live? And types of insurance

self insurance (where you bear all of the risk by yourself by not pooling your risk with others),

public insurance (where you are already covered by a, usually government, scheme, like universal health care), and finally the subject of today’s post,

private insurance (where you as an individual or family take our your own policy with an insurance company).

When it comes to health insurance, the country you live in and the state of its public health system will influence your decision perhaps more than any other factor.

The first question to ask is, do I have access to a public health system or universal health care?

What is universal health care?

Universal health care is a system that offers protection to all citizens of a country. It ensures everyone can receive treatment and medicine. Even those who are homeless. Unemployed. Pensioners who can’t otherwise afford insurance. Children born into poverty. This usually means that the government pays for some or all health care via taxation.

If you are covered by a form of universal health care like Australia’s Medicare, you are not really making a choice between private insurance and self insurance. You are making a choice between private insurance on the one hand, and public insurance + self insurance on the other.

As an Australian, answering the question of an Australian reader, I’ll use Australia as the default example throughout this post. (Although many of the questions I raise should be asked by anyone, anywhere).

Currently in Australia, we are encouraged to take out private health insurance by (unsurprisingly) insurance companies, and the government. Young people in particular are penalised for not getting on board. And they’re blamed in the media for rising insurance costs. (The theory being that when higher-risk old people and lower-risk young people pool together, it lowers the overall risk profile).

Yet while there has been a slight drop off in young people holding private health insurance, the Conversation reports that it is the fact that people are using their insurance more that is making it more costly. This is common to both private and public healthcare in Australia. It’s not young people’s fault.

Furthermore, very little is done to positively motivate young people to sign up.

Rebates

In Australia, those whose income is under a certain threshold are eligible to claim a portion of their private health insurance back from the government in the form of a rebate. But now that private health insurance rebates are means tested, older people get consistently much larger rebates than young people. Even if they earn more, and despite the fact that they use the system far more.

How on earth this is designed to promote uptake of private health insurance among young people is beyond me. I’m all for means testing when resources are limited – ensuring that public funds are directed towards those who need it the most. But adding age as a criterion, and using it to help those who need it the least (in the sense that an older person has had a lifetime to accumulate the necessary wealth to pay for insurance that a young person has not) goes beyond means testing and borders on discrimination.

Let’s beat them with sticks!

When it comes to young adults, the government and industry alike have taken a stick rather than a carrot approach.

The government uses a couple of different sticks to goad people into taking out private health insurance. These sticks are used for all they are worth by insurance companies who assert that you would have to “be puffin’ muffins” or some other such nonsense not to take out private insurance. They claim that if you don’t, you are simply throwing money away through the Medicare Levy Surcharge and the Lifetime Health Cover loading.

Let’s take a look at each of these in turn, and how they might affect you if you are an Australian – and particularly a young Australian perhaps coming off your parents’ health insurance plan for the first time in your 20s, or looking down the barrel at the LHC loading which kicks in if you don’t buy insurance before you hit 31.

The Medicare Levy

The first thing to know about the Medicare Levy is that it is not a ‘tax’. Even though it is an amount you must pay to the government, calculated as a percentage of your taxable income, paid at tax time via your tax return. Through a fine piece of linguistic finangling, it is not a ‘tax’, but a ‘levy’.

At present in 2018, this tax – sorry, levy – is 2%, with plans to increase it this year to 2.5%. Those on low incomes (below $21,335, or $33,738 for seniors/pensioners) are exempt. Again, we see favourable treatment based on age. The elderly allowed to earn over $10k more than a young person just starting out. But basically, if you are earning over minimum wage, you will have to pay the Medicare Levy.

Despite some popular misconceptions, you cannot get out of paying the Medicare Levy if you earn more than the amounts listed above. Private health insurance will not make you exempt from this charge. But there is a disincentive that has to do with how much you earn.

Medicare Levy Surcharge

On top of the regular Medicare Levy is the Medicare Levy Surcharge. The MLS is aimed at encouraging wealthy individuals to take out private health insurance. Individuals with a taxable income of over $90,000, or families with more than $180,000 (with additional allowances for children) are required to pay a MLS of between 1 and 1.5%. This means an individual earning $90,001 would have to pay a $900 penalty for not having private health insurance.

If you earn more than $20 or $30,000 a year, but less than $90,000, the Medicare Levy and MLS shouldn’t factor into your decisions. You can’t get out of paying the ML, and the MLS won’t apply to you.

If you do earn over $90,000 a year, things are slightly different:

Let’s compare insurance for a healthy 30 year old female. She has no preexisting conditions and no particular desires for any special coverage. She’s not starting a family, not requiring any particular treatments etc. On both the government’s own website and the commercial comparison site advertised above, the cheapest policy I could find, with the most basic cover, was $92.56 a month.

With the government rebate for someone earning just over the $90k threshold, this comes down to $76.55 a month. Or $918.60 a year.

In short, I have never been able to find even a basic private insurance policy which costs less than the minimum MLS you’d have to pay without it. (If you can, please let me know!) But as this example demonstrates, a basic level of private cover can be had for a little more than you’d otherwise be paying the government.

It is, however, very basic. You will still have to rely on Medicare or self insurance for many treatments.

The second disincentive has to do with age more directly.

Lifetime Health Cover Loading

In Australia, following the age of 30, unless you are a member of a very small group of exempt individuals, you will have to pay a 2% loading on top of your regular premium for every year you did not have private health insurance. This is regardless of how much you earn. Even if you could not afford to buy private health insurance when you were younger, you will still be penalised. Thus, if you wait until, say, 40 to take out a private policy, your premiums will cost 20% more than if you had taken out a policy at age 30. (2% x 10 years)

This explains why even though private health insurance membership is rare among those in their 20s, it increases dramatically among those in their early 30s. (That and the fact that many people sign up when they decide they want to have kids).

The effect of waiting

Let’s say our same healthy 30 year old female above waits until she is 40 now to take out the same policy. With a 20% LHC loading, she will have to pay $17.35 per month extra on the cheapest policy.

Performing all of our calculations in ‘today’s dollars’ (in reality, insurance costs will go up, as, hopefully, will our example woman’s income, the tax brackets, etc.), holding insurance between the ages of 30 and 40 would have cost her $9,186. That equates to 529 months’ worth of loading costs, or 44 years. In other words, she will be EIGHTY FOUR before having to pay the loading means she would have been financially better off taking out insurance at 30. (Barring any dramatic healthcare costs above that sum that would have been covered).

Now of course, over these 44 years, costs will likely go up astronomically. A basket of goods costing $100 44 years ago would cost around $900 today. But likewise, if you invested $100 44 years ago, it would be worth much more today (of course depending on what you bought in both cases!) As we will see below, however, health insurance in Australia tends to go up in price much more than other goods.

Yet, in a recent change to government policy, LHC loading is now capped at 10 years. So it’s not quite as scary as it used to be. If you couldn’t afford private health care when you were younger (and given the age-based discrimination in the system, many can’t) you won’t be penalised for this forever.

The effect of a public vs. private system

In spite of government rebates for private health insurance, premiums continue to rise each year. The $76.55 a month policy I mentioned above is forecast to go up by $4.53 to $81.08 next month. That may not sound like much, but it will bring the total cost up to $972.96 for the year, instead of $918.60. An increase of almost 6%. That is far beyond the current inflation rate, which is just 1.9% at present. In other words, insurance costs are likely to go up faster than your pay (and as a result, your Medicare Levy surcharge, if any).

While it may be easy for us to see rebates as a gift or a reward from the government, really, they are a form of government subsidy for a private system which only the rich can afford. Just like private schools.

As Elizabeth Savage, professor of health economics reports, the rebate subsidy was introduced more on the basis of media coverage than evidence. After the introduction of Medicare in the 1980s, private health insurance membership dropped from about 50% to 30%. The story was that healthy people were dropping out, reasoning that public care would be sufficient for them, and creating an unsustainable system in which only the old and sick held on to their private insurance.

The reality, however, was that those who kept their private health insurance in spite of the availability of public cover were – unsurprisingly – those who could afford it. And the rich tend to be healthier on the whole.

Propping up the rich to fix a non-existent problem

In a nut shell, the prediction came true – in part. There was one system with an over representation of sick and elderly people. But it wasn’t the private system, funded by its wealthy members. It was the public system, with its mainly poorer demographic.

But the damage was already done – and continues. To fix a problem that doesn’t exist, just like private schools, private health funds are propped up by government funding in the billions of dollars. And costs continue to increase, as insurers increasingly focus on ‘extras’ cover, which are more profitable for them.

The rebate makes some sense if we view it as the government refunding people for the types of cover they would have had if they used the public instead of private system.

But despite these extras not being services that replace Medicare cover, the rebate is applied to them too. Essentially, this means that someone who can afford extensive private health insurance can have the government pay almost a third of the cost of their glasses, dentistry, or even aromatherapy. Golf clubs. Or CDs of relaxing music. Meanwhile a poorer person must pay for all such expenses – necessary or not – out of their own pocket.

The LHC loading penalty, too, was supposed to lower premiums, by lowering the overall risk to insurers by encouraging more young and healthy people to sign up. But surprise surprise, it has not. Despite the lowered risk, insurers have increased average premiums.

So what’s the story?

Recently, the narrative has moved away from one of insuring the viability of private insurers. Health insurance companies in Australia make enormous profits, so clearly they aren’t at risk of going bust any day soon. Instead, we are told that taking out private insurance will help reduce the pressure on the public system. But this hasn’t happened either, with waiting times remaining unchanged.

Private insurance certainly has its advantages, especially when it comes to waiting times and certain patient outcomes. But it contains surprises too. Some patients who have private insurance choose not to use it, which sounds insane at first. But sometimes, you can be better off going in as a public patient instead of private and paying the gap. Other patients reported being unable to make use of their private insurance, because being admitted as a private patient entailed a series of additional charges, not covered by their insurance, which had to be paid out of pocket. These can run to the thousands of dollars.

In one case, a patient reported that their insurance wold not cover the cost of their anesthetist. Now, I’m not a medical doctor, but an anesthetist is pretty vital if you’re going into surgery, I would have thought.

What ever you do, read carefully

If you’re looking at an insurance policy for any risk – healthcare, life, income protection, auto – don’t forget to read the terms and conditions, and the exclusions, carefully. As I detailed in a recent post, while income protection insurance can be super important when you have a mortgage (insuring that, if you or your partner become disabled or die, your mortgage will still be paid so you/your dependents still have a place to live) it may not pay out if you are already ahead in your payments.

Before you go into hospital for a scheduled treatment, make sure to ask what will and won’t be covered if you have private insurance. Unfortunately, the onus appears to be on the patient.

If you are looking for cover for a medical issue you already have, or think might crop up, check the waiting periods and exclusions carefully.

Insurance marketing tactics

Marketing can be broadly divided into ‘hard’ and ‘soft’ sell tactics. Often, life insurance is sold using a soft sell, one designed to tug on the heartstrings. It may be so subtle, you don’t even realise what is being advertised until the end. This allows time for the emotional impact of the situation to sink in, and for you to make the decision with these images playing on your mind.

When you are bombarded with unfamiliar terms and deadlines with penalties attached, it can be difficult to make a rational decision. It seems like you need to make a snap decision, and that making any choice now will be better than delaying.

Remember that it’s all marketing bluster. With the internet, the meaning of all of those terms is at your fingertips. The sticks the government has put in place aren’t that bad. It’s worth taking your time to read what you are getting into carefully.

A final word…

Ultimately, I think most people will take out the insurance they can afford. There is no single ‘best’ answer, because a policy that is unaffordable to you is clearly not a good policy. But if you are a young person wondering what to do about looming deadlines and being pressured by insurance companies, remember that it’s never too late. If you want to, but don’t have the money to take out an insurance policy now, you can always do so later. The LHC loading is capped at 70%, which means that while your premiums might get significantly more expensive, they will never escalate exponentially (unless there are some dramatic governmental changes). And now that it’s capped at 10 years, it’s not a life sentence either.

Choice found that the iSelect site compared only 11 of the 37 available health funds in Australia – less than a third. Despite being the most visited comparison site, it performed the third worst in terms of number of funds compared. And, like any time you are using a broker, beware that it is not really a free service. Up to 40% of the first year’s premium can be paid to the broker (or website) as a commission. That means, on a $918 policy, there’s about $367 of built-in fat. Now you’re really cuddlin’ cactus!